OECD Cost Contribution Arrangements Draft Emphasizes Value

A Tax Analysts news analysis by David D. Stewart discusses the April 29, 2015, release of a discussion draft under action 8 (on aligning transfer pricing outcomes with value creation related to intangibles) of the base erosion and profit-shifting project (BEPS), proposing revisions to the OECD transfer pricing guidelines on cost contribution arrangements (CCAs) that support the use of value contributed rather than the costs incurred.

The draft would replace the existing Chapter VIII of the transfer pricing guidelines on CCAs.

According to the OECD, this clarifies the guidance to require contributions to be measured at value rather than at cost to ensure that outcomes won’t differ significantly regardless of whether using a CCA. Contributions must be assessed based on their value to be considered consistent with the arm’s length principle.

The draft states that in some cases, like low-value-added services, the difference between value and costs is “relatively modest,” in which case these contributions can be valued at cost. However, the draft argues that in most cases costs won’t provide a reliable basis for determining value and using them may lead to non-arm’s length results.

Guy Sanschagrin, Principal and Leader of WTP Advisors’ Transfer Pricing Practice, does not believe this draft helps clarify the guidance as it is intended to do. Instead, he thinks it creates an environment of heightened controversy.

“I have a problem with the overall BEPS approach of focusing on value creation as a way to drive the transfer pricing because I think there is a potential contradiction with the arm’s length standard,” said Sanschagrin. He explained that he sees the focus on value creation as reducing the importance of other factors and capabilities as well as “risk-taking attributes of transactions.”

“Thomas Edison did not invent the light bulb. Somebody else did. What Thomas Edison did was successfully commercialize the light bulb. He set up a system to innovate and organize [research and development] processes. He also led the development of efficient manufacturing processes. He had help from employees – but he led this effort,” Sanschagrin said.

He went on to say that while value is important, it is in some ways secondary to the underlying resources and costs that were used to create the value and needs to be balanced with innovation and risk/reward trade-offs and other considerations made in arm’s length dealings. He suggested that encouraging a premium on services over costs increases the potential for controversy.

“I think there is a strong potential for double taxation to come of that due to disagreements in terms of the value measurement,” Sanschagrin said.

Comments on the draft are due May 29 and the public consultation will be held July 6 or 7.